Now, suppose Japanese officials believe that intervention is required regardless of the G-20. Presumably, they will give US Treasury Secretary Timothy Geithner a phone call to at least keep him in the loop, if not to receive his implicit consent. One wonders if Geithner will recognize what he would be consenting to: Japanese intervention, if it occurs, means that Chinese authorities managed to get Japan to acquire their Dollar reserves for them. Instead of buying Dollars, China buys Yen, which in turn induces Japan to buy Dollars. This maintains the artificial capital flows to the US while allowing China to escape accusations of being a "currency manipulator."

Japan's government said it will seek discussions with China over the nation's record purchases of Japanese bonds as an appreciating yen threatens to undermine an economic recovery.

Japan is closely watching the transactions and will seek to maintain close contact with Chinese authorities on the issue, Vice Finance Minister Naoki Minezaki told lawmakers in Tokyo. Finance Minister Yoshihiko Noda suggested at the same hearing that it's inappropriate for China to buy Japan's bonds without a reciprocal ability for Japanese to invest in China's market.

Did policymakers recognize the irony of their situation? It is not exactly a secret that Japan has made frequent excursions into the currency markets. But apparently they feel that intervention should be limited to Dollar purchases. Surely another Asian nation wouldn't play the same game on them?

Alas, the Chinese did - under pressure to "loosen" the renminbi - and pushed the Japanese into intervening last night to tame the surging Yen. In effect, the Chinese managed to get the Japanese to do their Dollar buying for them. Honestly, I have a hard time faulting the Japanese. They are facing a serious deflation problem, and pumping Yen into the system is an appropriate response (although they might simply sterilize the intervention, which would be, in my opinion, a policy error).

What must be going through the head of US Treasury Secretary Timothy Geithner at this point? After all, as far as global imbalances are concerned, if he can't stop central banks from intervening in the Dollar, he really isn't going to be making much progress on reversing the deteriorating US trade deficit. And before anyone gets too excited about the most recent trade numbers, note the trend remains intact. Moreover, CR is tracking the LA ports data, and it looks ugly. Geithner is now out and about trying to jawbone Chinese officials. From his interview with the Wall Street Journal:

WSJ: Are you satisfied with China's progress on the yuan?

Geithner: Of course not. China took the very important step in June of signaling that they're going to let the exchange rate start to reflect market forces. But they've done very, very little, they've let it move very, very little in the interim. It's very important to us, and I think it's important to China, I think they recognize this, that you need to let it move up over a sustained period of time.

So, Geithner finally realizes the extent of the Chinese nonevent. Recall the press fanfare that accompanied the initial Chinese currency announcement - journalists falling all over themselves to speak brightly of China's economic maturation. How many of those stories were sourced by Treasury officials crowing about the breakthrough that allowed them to avoid labeling China a currency manipulator? And where does this leave Geithner? Either complicit in trumping up the most minor of policy adjustments, or completely sucker punched by his Chinese counterparts. Honestly, I don't know which is worse.

What it all boils down to is this: There apparently is no motivation for global central banks to stop directing capital inflows at the US in an effort to support mercantilist objectives. If it isn't China, it will be some other economy. And equally apparent, there is no motivation among US policymakers to address such government directed capital flows. Which will leave politicians falling back on ultimately harmful trade barriers. The absolute inability of US policymakers to seriously address a global financial architecture where a rule of the game is "when in doubt, by Dollars" will ultimately have serious consequences via disruptive adjustment when the system can no longer be maintained, via either external or internal forces.

If you actually ask small businesses what they are worried about instead of asserting what's politically convenient, and do so consistently over time so you can detect where big swings occur, it's clear that small business believe that lack of demand is the biggest problem they face right now:

Thirty-one percent of small businesses surveyed by the N.F.I.B. said that "poor sales" are their company's "single most important problem." The other options included were competition from large businesses, insurance costs and availability, financing and interest rates, government requirements and red tape, inflation, quality of labor, cost of labor and "other."

Here's a chart breaking down what percent of small businesses cited each of these problems as their biggest challenge, going back to 1986:

National Federation of Independent Business, via Haver

...[A]s you can see, the portion of small businesses citing taxes as their superlative problem has remained about the same — mostly in the 17-22 percent range, say — for about a decade. Additionally,... financial and interest rate concerns are a comparably negligible concern.

By contrast, the share of companies saying the poor sales is their main challenge has about doubled since the downturn began....

There's also a big change in the "insurance cost/availability" category in 2008 when these worries ease relative to the earlier 2000s (the bulge in this category seems to accord fairly well with the Bush years). That, like the rest of the evidence in the chart -- there's a very small increase in the answer on government requirements and that's about it -- is inconsistent with the charge that this administration is holding back the recovery by creating business uncertainty. It's the decline in demand that has small businesses the most concerned.